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Spending and Saving; The Odd World of the Pandemic

June 1, 2021 | Commentary

  • Despite an economy that has progressed from the pandemic shutdown in Q2 of 2020, saving and spending behavior remains greatly distorted as compared with pre-pandemic days. The transitory nature of stimulus support is a key reason why.
  • People increase spending when they perceive a permanent increase in income.  The supplemental income payments in response to the pandemic are anything but.  Theory and historical evidence suggest that a high fraction of such temporary income boosts get saved, and that is exactly what we are seeing.
  • Banks are in an unusual position with deposits climbing while loans, including credit card debt, is falling.  Traditional measures of the money supply only look at the deposit side. This imbalance between deposits and loans has distorted any analysis of the increasing money supply and the ultimate impact on inflation.
  • At some point the recovering economy will be more based on fundamentals and rising wages versus short-term fiscal stimulus.  When that happens, spending and borrowing will resume the pre-pandemic pace.  Everyone should carefully watch the ultimate impact on inflation.

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